Beijing, 2013-01-09 – Since 2007, the financial crisis has pushed the world into an era of low, near zero, interest rates and quantitative easing, as most developed countries seek to reduce debt pressure and perpetuate fragile payment cycles. But there is a strong risk that real (inflation-adjusted) interest rates will rise over the next decade.

The total capital assets of central banks worldwide amount to $18 trillion, or 19 percent of global GDP twice the level of 10 years ago. This gives them plenty of ammunition to guide market interest rates lower as they combat the weakest recovery since the Great Depression. In the United States, the Federal Reserve has lowered its benchmark interest rate 10 times since August 2007, from 5.25 percent to a zone between zero and 0.25 percent, and it has reduced the discount rate 12 times (by a total of 550 basis points since June 2006) to 0.75 percent. The European Central Bank has lowered its main refinancing rate eight times, by a total of 325 basis points, to 0.75 percent. The Bank of Japan has twice lowered its interest rate, which now stands at 0.1 percent. And the Bank of England has cut its benchmark rate nine times, by 525 points, to an all-time low of 0.5 percent.

But this vigorous attempt to reduce interest rates is distorting capital allocation. The US, with the world’s largest deficits and debt, is the biggest beneficiary of cheap financing. With the persistence of Europe’s sovereign-debt crisis, safe-haven effects have driven the yield of 10-year US Treasury bonds to their lowest level in 60 years, while the 10-year swap spread – the gap between a fixed-rate and a floating-rate payment stream – is negative, implying a real loss for investors.

The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-fourth of GDP, compared to the pre-crisis average of 8.7 percent of GDP. As this figure continues to rise, investors will demand a higher risk premium, causing debt-servicing costs to rise. And, once the US economy shows signs of recovery and the Fed’s targets of 6.5 percent unemployment and 2.5 percent annual inflation are reached, the authorities will abandon quantitative easing and force real interest rates higher.

Japan, too, is now facing emerging interest-rate risks, as the proportion of public debt held by foreigners reaches a new high. While the yield on Japan’s 10-year bond has dropped to an all-time low in the last nine years, the biggest risk, as in the US, is a large increase in borrowing costs as investors demand a higher risk premium.

Once Japan’s sovereign-debt market becomes unstable, refinancing difficulties will hit domestic financial institutions, which hold a massive volume of public debt on their balance sheets. The result will be chain reactions similar to those seen in Europe’s sovereign-debt crisis, with a vicious circle of sovereign and bank debt leading to credit-rating downgrades and a sharp increase in bond yields. Japan’s own debt crisis will then erupt with full force.

Viewed from the perspective of creditors, the age of cheap finance for the indebted countries is over. To some extent, the over-accumulation of US debt reflects the global perception of zero risk. As a result, the external-surplus countries (including China) essentially contribute to the suppression of long-term US interest rates, with the average US Treasury bond yield dropping 40 percent between 2000 and 2008. Thus, the more US debt that these countries buy, the more money they lose.

That is especially true of China, the world’s second-largest creditor country (and the US’ largest creditor). But this arrangement is quickly becoming unsustainable. China’s far-reaching shift to a new growth model implies major structural and macroeconomic changes in the medium and long term. The renminbi’s unilateral revaluation will end, accompanied by the gradual easing of external liquidity pressure. With risk assets’ long-term valuations falling and pressure to prick price bubbles rising, China’s capital reserves will be insufficient to refinance the developed countries’ debts cheaply.

China is not alone. As a recent report by the international consultancy McKinsey & Company argues, the next decade will witness rising interest rates worldwide amid global economic rebalancing. For the time being, the developed economies remain weak, with central banks attempting to stimulate anemic demand. But the tendency in recent decades – and especially since 2007 – to suppress interest rates will be reversed within the next few years, owing mainly to rising investment from the developing countries.

Moreover, China’s aging population, and its strategy of boosting domestic consumption, will negatively affect global savings. The world may enter a new era in which investment demand exceeds desired savings, which means that real interest rates must rise.

Zhang Monan is a fellow of the China Information Center, fellow of the China Foundation for International Studies, and a researcher at the China Macroeconomic Research Platform.

Peace Through Tourism

How Travel & Tourism Can Help Restore the Balance in the Emerging New World Order

"The travel & tourism buzzword of the 21st century will be the search for balance."

That forecast was made by Imtiaz Muqbil, Executive Editor, Travel Impact Newswire, in the monthly strategic intelligence publication of PATA, the Pacific Asia Travel Association, way back in February 1999. Today, it is proving spot-on as the word "balance" resonates across all industry sectors.

Travel industry conferences seeking a speaker who can offer some unique historical hindsight, unconventional foresight and thought-provoking insight on how to rebuild and restore the balance in Asia Pacific travel & tourism can email Imtiaz Muqbil by clicking here.

There Can Be No Sustainability Without Spirituality

The New World Order will be dominated by a resurgence of spirituality.

Imtiaz Muqbil claims to be the world's only travel journalist to have visited the Holy Spots of all the major world religions -- Lumbhini, Bodhgaya, Varanasi, Nalanda, Jerusalem, Vatican City, Amritsar, Makkah, Madinah, Najaf and Karbala, as well as religious spots such as Angkor Wat, Bagan, Shwedagon Pagoda, Temple of the Emerald Buddha, Temple of The Tooth, Somnath Temple, Samarkand, Bukhara and many other great mosques, shrines, temples and cathedrals worldwide.

Sustainability, ecotourism and health & wellness travel have all become so 'yesterday'. Prepare for the new generation of travel in the New World Order and raise the bar of your next conference, management forum or seminar by hearing Imtiaz Muqbil's thoughts on this unmatched game- and life-changing experience.

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Secrets of Thailand's Tourism Success

Why the Amazing Kingdom is notching up record-breaking arrivals, and what challenges it faces next

The Thai tourism industry has become by far the Kingdom's most successful service sector, one of its leading job-creators and foreign exchange-earners. Behind this success lies a fascinating history of great branding campaigns, policy and regulatory changes, budgetary bunfights, strategic thinking and influence of Royal events.

But this success has now bred a new set of management challenges that may be more difficult to overcome.

Travel Impact Newswire Executive Editor Imtiaz Muqbil has been monitoring the pulse of the Thai travel industry full-time since 1981. Industry conferences and management meetings wishing to benefit from a treasure trove of insights and hindsights on one of the world's great tourism success stories can drop an email here: imtiaz@travel-impact-newswire.com.

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The Rise of the Whistle-Blowers

For 15 years (January 1997-July 2012), Imtiaz Muqbil penned a hard-hitting fortnightly column called “Soul-Searching” in the so-called “newspaper you can trust”. In July 2012, the column was gagged, with no explanation.

Over the years, four columns had explicitly forecast the rise of whistle-blowers -- a prediction now coming 100% true. Read the four columns by clicking on the links below.

Too Bad Your Ad Is Not in This Spot

Space available for unique ads that demonstrate commitment to helping physically-challenged people, building global peace, improving social and cultural cohesion, providing opportunities for the under-privileged, alleviating poverty and combatting global injustice & corruption.

If your product is not meeting any of the above goals, please advertise elsewhere.

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News Vs Noise

A Unique Course for Travel & Tourism Communicators In The Internet Era

By far the vast majority of media communications in the travel industry is boring, banal and bland. The same way it has been for the last 30 years.

Travel Impact Newswire Executive Editor Imtiaz Muqbil has designed a special communications course to help upgrade both the context and the content of industry media material, and make it more interesting, readable and, most important, relevant.